Independent Bank Corp.
Q4 2017 Earnings Call Transcript

Published: 19 Jan 2018

[Operator:]

Good morning and welcome to the Independent Bank Corp.’s Fourth Quarter 2017 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] This call may contain forward-looking statements with respect to the financial conditions, results of operations and business of Independent Bank Corp. Actual results may differ. Factors that may cause actual results to differ include those identified in our Annual Report on Form 10-K and our earnings press release. Independent Bank Corp. cautions you against unduly relying upon any forward-looking statements and disclaims any intend to update publicly any forward-looking statements whether in response to new information, future events or otherwise. Please note, this event is being recorded. I would now like to turn the conference over to Chris Oddleifson. Please go ahead.

[Chris Oddleifson:]

Thank you, Brendan, and good morning, everyone. Thank you for joining us today. As always, I’m accompanied by Rob Cozzone, our Chief Financial Officer and our new Head of Consumer and Business Banking. We closed out 2017 with another very solid quarter. Inclusive of onetime write-downs related to the new tax legislation, net income in the fourth quarter came in at $22.1 million or $0.80 per diluted share on a GAAP basis. Excluding the onetime expenses, operating net income rose to $24.4 million or $0.89 per diluted share, once again nicely above prior period and prior year comparisons. Rob will be covering the quarter in greater detail, but I’d like to focus my comments today on a year just completed. 2017 marked the fifth consecutive year of record earnings of virtually across the board growth in key financial metrics, including 10% growth in operating EPS -- 10% revenue growth including a 20 basis-point improvement in the net interest margin, ongoing core deposit growth that has reached 90% of total deposits. Notwithstanding the decline in utilization rates, our loan origination efforts remained quite robust having generated just over $1 billion in new commercial loans, continued stellar credit quality with non-performing assets declining 18% along with the loss rate of just 6 basis points for the year, disciplined expense management that has driven our efficiency ratio below 60%, a quarterly ROA that has reached 1.2% on an operating basis and an ROE up 10% and steady growth in tangible book value per share that was up an additional 9% last year, despite absorbing another acquisition. Beyond the numbers, much was accomplished last year moving the Rockland Trust franchise forward. We successfully integrated The Edgartown National Bank on Martha’s Vineyard, which expanded our Cape Cod market. We couldn’t be happy with progress to-date with the household retention rate of 97% and a great reception in local marketplace. We’re making great strides in the coveted Greater Boston market with encouraging growth in brand awareness, households and new business generation. Our high priority investment management business is growing very well too. Assets under management grew by 19% last year to $3.5 billion with revenues up just under 10%. We’ve added many experienced commercial bankers from competing institutions, plus added [ph] significant breadth and origination capacity to our lending operation. We continue to upgrade the online banking experience and expand our digital offerings with a number of mobile banking users rising by 35% last year. We’re making greater use of the sales force platform to maximize our usage of customer information and elevate our sales and marketing efforts. We’re continuing to invest in technology, in areas such as security, enterprise risk management and API development. We also significantly advanced our readiness for the agile [ph] requirements that come with inevitably reaching the $10 billion size threshold. And lastly, we continue to garner high profile third-party recognition for a variety of sources including the highest ranking for customer satisfaction with retail banking in New England by J.D. Power. As proud as we are of our track record of financial performance and accomplishments, we fully acknowledge that none of this comes easy that environment will remain fierce. The incredibly rapid pace of technology and changing customer preferences presents many challenges as you must continually balance the need to invest while maintaining fiscal discipline. We never underestimate how hard we must work to win and continue earning our customers’ trust. We’re up to the task and bring required confidence to sustaining our success. The economic environment continues to cooperate as the national economy is now entering year nine of an economic expansion. The Tax Cuts and Jobs Act is expected to add further stimulus to the healthy 3.2% national third quarter GDP growth, all while the labor market remains at levels consistent with full employment. The Massachusetts benchmarks leading economic index shows that Massachusetts state economy is also expected to continue to growing at moderately robust pace. Third quarter real GDP was measured at 5.9% while the local economy continues to benefit from strong wage and employment growth. The Massachusetts unemployment rate of 3.6% is even stronger than the 4.1% national level. Heading into the New Year, our strategic priorities remain as before, the one constant is our commitment to staying focused. Discipline across all funds, credit, pricing, interest rate risk, capital liquidity and service level for these many years and we -- continue to be the cornerstone of our franchise. We’ll continue to selectively invest in growth initiatives, all with a keen eye on expanding existing customer relationships and adding new ones. Improving the customer experience is foremost in our mind, which cuts across our product offerings, access modes, security systems and service quality. And we continue to work on optimizing our branch configuration, and we will capitalize on our growing brand awareness and the many opportunities in our new markets. And finally, we will continue to invest in our greatest resource, our people. Our success is intrinsically tied to my skilled, motivated and satisfied colleagues. On that score, in the latest Boston Globe Top Places to Work in Massachusetts survey Rockland Trust was included for the 9th consecutive year and ranked number one among financial services and number two across all large employers in the state. We will further enhance our work environment by sharing some of our savings in the lower corporate tax rate with my colleagues in the form of compensation and family-friendly benefits. We couldn’t be proud of our Rockland Trust colleagues. Before turning over to Rob, I would like to acknowledge our directors who retired in 2017, Maurice Sullivan and Bill Bissonnette for their service and contributions to our Board of Directors. I greatly value their insight and wish them both very best. That’s it for me. Thank you. Bob?

[Rob Cozzone:]

Thank you, Chris. Good morning. As Chris just highlighted, our financial performance for the year and quarter was quite strong and continues to reflect our determination to stay focused on our priorities and disciplined in our decision-making. I will now review those results in more detail. Inclusive of the $0.09 per share impact of one-time adjustments resulting from tax reform legislation, net income and earnings per share for the fourth quarter were $22.1 million and $0.80, respectively. The lowering of the corporate tax rate from 35% to 21% effective January 1, 2018 required the Company to adjust the value of its deferred tax assets and liabilities, and low income housing tax credit investments during the fourth quarter. Those adjustments, which flow through the tax line and are detailed in the press release, increased taxes by a total of $2.4 million in the quarter. Excluding those adjustments, operating net income and earnings per share reached record highs at $24.4 million and $0.89, respectively. When compared to the prior year’s fourth quarter, operating net income and earnings per share increased 21% and 17%, respectively. Full year operating net income of $91.7 million and full year earnings per share of $3.35 were also new highs for the Company. Thoughtful execution of our priorities has continued to result in improved profitability. On an operating basis, return on assets was 1.2% and return on tangible common equity was almost 14% in the quarter. And even with the tax law related write-downs, strong core earnings drove a $0.48 increase in tangible book value per share during the fourth quarter. And as Chris mentioned, for the year, tangible book value is up $2.15 or 9%. As anticipated, commercial loan growth accelerated during the quarter with portfolio growth of 1.5% or $68 million. C&I growth was particularly strong as healthy new business volumes were not offset by declines in utilization as experienced in the third quarter. That growth was complemented by solid growth in all other commercial categories as a result of robust new business activity. The experienced hires we brought on are already gaining traction. Consumer real estate portfolios were essentially flat quarter-over-quarter as the cumulative rate increases may be having a tamping effect on demand. And total loans grew by 1% in the quarter and by 5.9% for the year when including the acquisition of Edgartown National Bank. Excluding the acquisition, organic loan growth for the year was 3.3%. With the strong closing volumes in the quarter, all loan pipelines were lower as of December 31st and first quarter growth will likely be as muted as those rebuild. Deposit growth of 0.7% during the fourth quarter was concentrated within the interest bearing categories. This customer-driven remixing along with selective product level rate increases drove an anticipated 2 basis-point increase in the cost of deposits to a still low 22 basis points. However, with a reduction in borrowing costs, the total cost of funding was only up a basis point to 28 basis points for the quarter. As guided, the net interest margin decreased slightly by 1 basis point in the fourth quarter to 3.64% and measured 3.6% for the full year. Increase in the cost of funding during the fourth quarter was partially offset by higher purchase accounting adjustments on loans. Margin expansion should resume in the first quarter of 2018 as a result of the fed fund’s increase in December. Non-interest income growth for the quarter was excellent at almost 5.5% un-annualized. Slight seasonal declines in deposit related fees were more than offset by continued momentum in investment management as well as a rebound in loan level derivative income. Assets under administration within the investment management group reached $3.5 billion at December 31st with a record new client asset volumes for the year being buoyed by strong market appreciation. The seasoned client team we added in the fourth quarter is already experiencing success. The other non-interest income category benefitted from strong 1031 exchange in asset-based lending fees as well as annual cap gain distributions on equity securities. Non-interest expense, although essentially flat quarter-over-quarter, was higher than anticipated due to additional incentive accrual and an executive severance payment. Loan workout costs which were elevated in the quarter, returned to a more normalized level in the fourth quarter. And the efficiency ratio declined further by 1% to 57.4% for the quarter. Asset quality metrics improved again. And if adjusted for the single commercial relationship described in previous quarters, non-performing asset levels and delinquency ratios would be at multi-year lows. Additionally, the credit outlook remains quite favorable. With only modest net charge-offs and a loss rate of 2 basis points, provision expense at $1.3 million was primarily needed to support growth. I’ll now turn to guidance. Consistent with our practice starting 2017, we will continue to describe our expectations on specific performance drivers but not earnings per share specifically, given the wide range of outcomes based on varying macro assumptions especially regarding interest rates. In that vein, we anticipate the following for 2018

[Chris Oddleifson:]

Thank you, Rob. Brendan. We’re ready for Q&A.

[Operator:]

All right. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mark Fitzgibbon with Sandler O’Neill. Please go ahead.

[Nick Cucharale:]

Good morning, gentlemen. This is Nick Cucharale filling in for Mark. So, first with respect to your loan guidance, I just wanted to dig into that a little bit. On an organic basis, you grew around 3.5% for the full year 2017. And just given the lending hires and the prospect for increased line utilization, just wanted to kind of get your sense on how you’re thinking about loan targets for the full year?

[Rob Cozzone:]

Yes. As I suggested in the guidance, Nick, that general trend is expected to continue with hopefully some additional leverage from those new adds and hopefully some leverage from an acceleration in economic growth. We have been in the last couple of years on that kind of low single-digit rate, but we hope that that will expand into maybe the mind single-digit rate. But, competition continues to be very intense and the impact of tax reform is still yet to be clear which is why my guidance was a little bit more neutral.

[Nick Cucharale:]

Okay, great.

[Chris Oddleifson:]

Yes. I mean, it’s point to remember that with our commercial banking sort of capacity in the area, we see a lot of deals. And it’s not a matter of us not knowing where the demand is, it’s a matter of the demand sort of fitting our credit and pricing parameters. So, we could exhibit a lot more loan growth significantly if we decided to sort of relax pricing and credit assumptions, and we just simply don’t that. Our constant is being really disciplined in credit and pricing.

[Nick Cucharale:]

Okay, great. And then, with your balance sheet at $8.1 billion, you still have some leeway before running up against that $10 billion in asset threshold. Could you just update us on your preparation for $10 billion and the incremental expense we can expect to see?

[Rob Cozzone:]

Yes. We’re actually pleased to say that last quarter we prepared our first FR Y-6 schedule, which is a schedule you need to submit to the fed for DFAST. It was an in-house schedule that we produced, hasn’t been validated by anybody, but just reaching the milestone of being able to populate that schedule with a model that we feel good about is a good place to be. So, we feel like our progress is moving ahead, as expected and that should we reach the $10 billion threshold, either organically or via acquisition, we will be well-prepared for that.

[Nick Cucharale:]

Terrific. And then, I just wanted to

[Rob Cozzone:]

Nick, I just want to point out that I think we’ve benefited from sort of the anticipating, the $10 billion, several billion dollars ahead of time, including for now all over decade, building out of business intelligence capability allowed us a very granular data access, staffing it with analysts that we both used for DFAST and a lot of our customer analytics. And so, the incremental expense for this is much lower than if we had to sort of do it all at ones and hire a consulting firms in here with a lot of information technology et cetera.

[Nick Cucharale:]

That’s great color. Thank you. And then, I just wanted to clarify, Rob, your margin guidance, does that include any future fed rate hikes?

[Rob Cozzone:]

It includes a March, which as of yesterday, the probability was essentially 90%.

[Nick Cucharale:]

Yes. Okay. And then, lastly, your internal capital generation is robust and you have strong earnings retention. Just given the benefit of tax reform, how are you thinking about capital management more broadly?

[Rob Cozzone:]

You’ll be hearing more about that in the coming months. That is a question that frankly we’re working through right now in terms of dividend policy. Certainly, the sort of increases in dividends that we have approved in the past or our Board has approved in the past is likely not sufficient going forward. But, we’ll be taking a close look at that and you’ll hear more about that in the coming months.

[Operator:]

Our next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

[Laurie Hunsicker:]

Just wanted to go back to Nick’s question on the $10 billion asset preps. If you were to sort of quantify, forget Durbin [ph] for a second, but if you were to quantify the incremental expense add versus where you are currently, what would that look like in dollars? What would you still have to layer in?

[Rob Cozzone:]

Yes. What we had suggested in the past, Laurie, and we’ve been incrementally making those investments kind of all along the way. In addition to obviously the impact of Durbin on the expense side, you have higher FDIC assessments. But, if you strip that out, the kind of investment needed, we would estimate it being a sub $1 million number sort of level or maybe slightly more, but that sort of scale, nothing significant.

[Laurie Hunsicker:]

Sub $1 million annually?

[Rob Cozzone:]

Annually.

[Chris Oddleifson:]

That’s incremental, Laurie.

[Laurie Hunsicker:]

Incremental, right, that’s great. Okay. And then, also just on expenses, I know you don’t provide exact color; I appreciate that we’re going to hear more on the dividend. But, if we just think about the tax windfall as it relates to expenses, can you just help us think about the dollar increase that we might see related to that? And I appreciate you gave us low to mid single-digit guidance on the non-interest expense increase over last year. But, as you know -- what core number you’re working on for that or just if you could help us a little bit with that?

[Rob Cozzone:]

Sure. We expect that our kind of tax reform accelerated decisions will result in about 1% additional increase in expense growth over what would have been a normal growth rate.

[Laurie Hunsicker:]

Okay. So, roughly $2 million annually?

[Rob Cozzone:]

Thereabout [ph]…

[Laurie Hunsicker:]

Give or take?

[Rob Cozzone:]

Give or take, yes.

[Laurie Hunsicker:]

Give or take, okay. And then, just to go back to loan growth, C&I was obviously great this quarter. I realize your overall loan growth you guided to be -- whatever, inline, so 3%, 4% annually. But your C&I growth, could we expect that line to continue to grow at close to this 14% annualized clip?

[Rob Cozzone:]

Yes. No, not that sort of clip. I mean that was certainly an outsized quarter, in addition to strong closing volumes. We did have a little bit of an increase in utilization. I don’t know if you recall from last quarter, but our utilization rates in the aggregate dropped 4.5% last quarter. They were up about a 0.5% this quarter. So that also helps growth a little bit, certainly not significantly. But, we did bring on some new hires, one of which is a corporate banking hire that is helping to move us up market and that individual is having a whole lot of success. And should he and others continue to have the same success, we would expect the C&I book to grow quicker than the rest of the commercial book.

[Laurie Hunsicker:]

Okay. Was there anything -- I am sorry.

[Rob Cozzone:]

I was just saying not at the sort of rate we saw in the fourth quarter though.

[Laurie Hunsicker:]

Okay. And was there anything purchased in this quarter, or we’re going to look at it?

[Rob Cozzone:]

We do -- we are doing some, you might characterize those as club deals. Our total true syndication portfolio ended the quarter at about $200 million in balances. And in the production number for the quarter I think there was at least one club deal, which we fully put through our credit process in our local borrowers in the New England states.

[Laurie Hunsicker:]

Okay. And then, just, sorry, last question. Do you know how big that club deal was?

[Rob Cozzone:]

If you look at our largest deal overall, it’s in the $25 million range because if we get a transaction larger than that, we typically participate it down and often times we will participate down the $15 million. So, one that I referenced this quarter was -- I believe it’ll maybe in the $20 million range, Laurie.

[Laurie Hunsicker:]

Okay.

[Chris Oddleifson:]

I am not 100% certain on that one.

[Laurie Hunsicker:]

Okay, okay. Great. And then just last question. And this rewinds back to not quite a year ago but when Matt from Piper had asked you Chris about your thoughts on growing, and you had stated “Hey! We could potentially at some point become a $15 billion to $20 billion bank.” Can you just give us a refresh as we sit almost a year out from that how you are viewing that, how you are thinking about the M&A landscape, your currency is strong, can you just give us a color?

[Chris Oddleifson:]

All right. I would say -- I’ll break that into two pieces, organic growth, as I think, hopefully you’ve picked -- we have demonstrated, we’re really focused on how we can grow organically by building a very solid platform across the board and we are doing that slow and steady. On the acquisition side, we have historically -- for the last 10 years or so have done acquisition every couple of years. And while there is no, I don’t have sort of -- I can’t see exactly into the future, I hope that trend will continue. If you look nationally, I mean, the M&A clip has been every year 3% or 4% of the banks are total -- banks are acquired or are merged. And there are additional banks in our area that are stock-based and should they raise their hand, we’d love to talk to them. I think, it’s a matter of when you’re thinking from their perspective, it’s a matter of thinking about sort of what is the best course for the future, considering all the constituents, shareholders and colleagues and communities and so on. So, things are -- I would say, the environment, the banking performance environment is very good right now. I don’t think there is a lot of urgency to figure out how to partner with other banks. But that can change tomorrow and we hope to be a player. And one last thing, I think for us to get to 15 or 20 will require acquisition. I mean, that is sort of -- the assumptions is that our past M&A sort of track record will in one way, shape or form continue as we go forward.

[Laurie Hunsicker:]

Sure. And then, just one last question, what is the largest deal you would consider doing right here in assets? Thanks.

[Chris Oddleifson:]

Yes. Largest, I mean, we’re really flexible on that. I think, the most important -- this is the thing -- rather than size, let me just describe what is most important to us, is that when we think about a combined entity that we’ll be able to continue in a combined way the sort of track record and performance and building outstanding place to work and outstanding place to bank and really develop competitive advantage around that. If -- and historically, our deals have been of the size where that’s been pretty straight forward. As the deals get bigger, I mean, the banks there that are much bigger than our past acquisitions, I just have to say that that’s certainly something we consider, but a lot of thought needs to go into the combined entity’s operating approach, culture, leadership et cetera to ensure that we’re building a first class combined franchise.

[Operator:]

Our next question comes from Matthew Breese with Pipar Jaffray. Please go ahead.

[Matthew Breese:]

Good morning guys.

[Chris Oddleifson:]

Hey, Matt.

[Matthew Breese:]

I just wanted to hone in on the commercial real estate book and I just wanted to get a sense for the outlook for growth in that segment and then just wanted to get a better sense for what’s going on in your market and underlying competitive conditions in that segment.

[Rob Cozzone:]

Yes, sure. I mean, in terms of growth, the guidance that I provided for the aggregate portfolio, growth will, is expected to be concentrated within the commercial book as it really has been for several years, if you look at kind of the long-term trends. So, we expect the consumer real estate book in aggregate to grow at a slower rate than commercial book. And, as you just heard from the commentary, within the commercial book, C&I is likely to be the fastest grower. In terms of the competitive landscape, thing has changed materially, the intensity of the competition is still at a very high level relative to any sort of history. And that’s partly because of what Chris just described is banks are feeling pretty good loans. I mean, there are no credit issues currently and don’t seem to be any on the horizon. And so, nobody is really inwardly focused on issues. And when we go through a credit cycle that’s what we tend to see happen, they get inwardly focused and that creates opportunities for those who are not distracted. But right now, that’s not the case at all. And most banks are generating sufficient capital, but they can continue to grow at a healthy clip. So, as Chris stated, we’re seeing lots and lots of deals but each of those deals are also being seen by at least a handful of other banks.

[Matthew Breese:]

Okay. That’s very helpful. And then, on tax reform, there has been a lot of discussion around how this eventually gets computed away. And I wanted to get your thoughts on that. Whether or not that’s an accurate assessment, what could happen? And where would you expect that to happen? And then, secondly, there is also a lot of discussion around economic expansion to the tax reform. And I wanted to get a sense for if you’re seeing any signs of that yet.

[Rob Cozzone:]

Yes. I would say on the latter, it’s very early, obviously, Matt. And we can’t specifically point to anything aside from some year-end kind of housekeeping items that folks executed on in last couple of weeks of the year that would provide us with sufficient direction going forward. And in terms of your former question, it will be interesting to see. I think the area that it may show up in is deposit pricing, especially in the northeast where many banks are liquidity constrained. This will, maybe give them the freedom to increase deposit pricing, more aggressively. And so, we are keeping a very close eye on that. Other areas, loan pricing is already very tight when you look at it from a return on capital perspective. So, I wouldn’t expect to see too much movement there in terms of spread compression, but we may see it on the deposit side.

[Matthew Breese:]

Got it. Okay. My last one again more of a big picture type of question. There has been some talk of Amazon potentially moving into your backyard. 50,000 new jobs and just wanted to get your sense for what you think that could do the Eastern Massachusetts markets and the local economy.

[Chris Oddleifson:]

That will be -- as I mentioned in my comments, the Massachusetts economy is growing really robustly without Amazon. With Amazon, I think we’d be able to maintain a very high level of growth. I will say that my also assessment is that if 50,000, -- a cap of a 50,000 versus certainly period over the next three years, there would be a lot of infrastructure investment required, which would fuel additional growth. I mean, we have to do a lot of improvement in our transit, our roads and our water fairies et cetera. And that’s -- that would be, that would go well for the economy for all of us. And lastly, you may recall that I’m very active in housing, affordable housing, subsidized affordable housing and affordable -- market rate affordable housing. And we have actually made some very good progress on that in the city, we have to make even more, which would fuel growth. The Governor has just proposed, and it’s a peak in hill right now, some housing legislation that will encourage housing growth in the suburbs, which I think if Amazon were to come along people to realize, I mean really get it, why we need to do this and that certainly would fuel growth. I think it will be very exciting next decade should the Amazon bring their headquarters and 50,000 highly skilled workers into our state.

[Operator:]

[Operator Instructions] Our next question comes from Collyn Gilbert with KBW. Please go ahead.

[Collyn Gilbert:]

Chris, maybe if you could just give us your thoughts on how you’re thinking about the wealth business, I mean that’s [ph] management business. Obviously, it was -- you had a good year this year. I think if we look back over a longer period of time, you guys were generating revenue growth in the mid double-digit range from ‘13 and ‘14, single-digit range ‘15, ‘16 and improved obviously in ‘17. How do you sort of see this business trending as we look out throughout ‘18 and ‘19?

[Chris Oddleifson:]

So, I would say that -- let me sort of back up a little bit. So, to give you a minute of history, I mean, this is a business we’ve been in since 1907; [ph] we were founded as a trust bank. 15 years ago, we really began our current journey in figuring how do we bring investment professionals into our Company. So, we’ve combined sort of industry -- in your industry expertise in the environment and couple with our customer relationships we have in retail and commercial banking. As a result, we’ve been able to originate a lot of -- much more new business than a typical bank or a typical investment firm our size. And in 2017, we had a -- we smashed any records we’ve had in the past in terms of new business origination. We originated over a $0.5 billion. And just as sort of interesting note, that is greater than our total assets were back 15 years ago when we began this journey. So, it was a very fun milestone, I think it’s the first time we’ve done that. Our growth is very primarily driven right now by the relationships we have with commercial and retail customers. So, as we expand, build new branches, expand lenders, expand geography, acquisition, that is really going to help us grow. Because I would say the reduction in revenue growth you’ve seen and we sort of anticipate 8% to 10% going forward is more result of a bigger denominator than it is sort of a lack of -- bit of a slowing momentum in the business. And lastly, I will say, a large opportunity -- two things, two more things, a large opportunity we see that whether we’ve sort of under -- done -- best ever this year, we sell a lot of [indiscernible] how we get non-customer, non-banking customer business. And to that end, one of the unique things about our business model is that we have about 15 business development officers. These are people who are 100% focused on following up the referrals and bringing new business into bank. And that is all built into our financial run rate, which gives us a lot of advantage. A lot of firms our size that we talk to, they do not have that sort of momentum, A, they do not have that capacity; and B, they don’t have the steady source of customer relationship referrals we get from a bank. So, we are actually very excited about this. And we think 8% to 10% is good revenue growth, which will probably maybe jump up if we have an acquisition and if there’s a lot of opportunity. And now, the head or the fellow who runs our investment management business, our wealth management business, David Smith, and he has background similar to mine, and what is driving him is ultimately to get to $10 billion. That is not in any official forecast, that is just aspiration that he throws out there. But certainly, when we were at about a $0.5 billion a number of years ago, getting to even a $1 billion seemed pretty darn thing, we’re now at $3.5 billion, and growing at a nice clip. I am wondering if you want to know Collyn, but…

[Collyn Gilbert:]

No, that’s helpful.

[Chris Oddleifson:]

It’s one of my soapboxes. I love talking about it.

[Collyn Gilbert:]

That’s great color. Well, as you guys are seeing this business coming in the door and getting new referrals and the like, where is the business coming from?

[Chris Oddleifson:]

Well, it’s pretty evenly split between our retail branch network and our commercial banking division.

[Collyn Gilbert:]

I mean, they are prior to -- like they are prior -- well, -- who -- if they had wealth accounts or investment accounts at other firms, what types of -- is it…

[Chris Oddleifson:]

That…

[Collyn Gilbert:]

…coming from or other banks or…?

[Chris Oddleifson:]

I think it’s sort of a combination of all that, plus of course we have relationships with a lot of people who sell their businesses. So, they have liquidity event. And this is a source of wealth as well.

[Collyn Gilbert:]

Okay, okay. All right. That’s helpful.

[Chris Oddleifson:]

And those big banking customers are -- they are a number of people who have got a CE strategy for decades and know we can help.

[Collyn Gilbert:]

Okay. So, it’s -- I mean, is it fair to characterize some of the growth from just the unbanked in this segment?

[Chris Oddleifson:]

The uninvested…

[Collyn Gilbert:]

Yes.

[Chris Oddleifson:]

Yes, I would say so. Yes, I think that’s fair.

[Collyn Gilbert:]

Okay. And then, just in your opening comments, Chris, you talked about sort of initiatives for the year, coming years. One of the things you mentioned was branch configurations. Can you just give us a little bit of update -- a little bit of an update on how you are thinking about your branches for this year and how those configurations are expected to look?

[Chris Oddleifson:]

Sure. If I can say one more thing about wealth management.

[Collyn Gilbert:]

Just one, Chris, are you sure?

[Chris Oddleifson:]

And that is that one of our strategic investments that we have made for 2018 is that hiring someone who not only has commercial banking background but also has a wealth management expertise and is also seeing some approaches and products that will better bring together our commercial banking capabilities and our wealth management capabilities. I hesitate to sort of call this a private banking but we’re beginning to think about how we sort of really upgrade our overall integrated service. Because the components we have in wealth management are that we think we have all the wealth management plus we have a full tax planning, tax prep, financial planning, and so we are helpful on those dimensions. So, we’re looking to sort of how do we make our offering more robust. Okay. So, that’s all I will talk about wealth management. [Technical Difficulty] On the brand configuration, this is an interesting one, this has been the sort of a $64 billion question for the 30 years I’ve been involved in bank management. And we have over the last 10 years done a number of incremental open closes to know those and last year is no exception. So, we have closed a couple of branches. We’ve relocated a branch and we also -- we transformed a couple of branches. What I mean by transform that is from a traditional looking branch to one that is more POD oriented, with conversations rooms and more important actual configuration, we think about the staff and the role of staff a little bit different in these transformed branches, much more universal banker, much more oriented towards conversations, building even better relationships and looking for opportunities. We have a couple very interesting things happening this year. We’re relocating our Hyannis branch to a nearby that will include not only the branch but wealth management commercial and so. We’re opening a new branch in Newton and we’re closing a branch in west. [Ph] So that’s sort of a little bit of a relo, merge combo. Now, we are also nearing sort of the completion potentially of a financial district branch that will be a smaller format with some additional technology. And that sort of brings me to my final sort of I think point. And that is as I’ve shared on previous calls, we have invested in a much uptick capability and how we think about branch location using a lot more data on the market, a lot more historical data on performance, looking at where our optimal places to not only place branches but potentially merge branches, what we call network optimization. And so, we think about the network in terms of our [indiscernible] and where they are but then also what happens, so what is the design of the branch and what happens in the branch. My prognostication the next 20 years would be that we will see, any industry, fewer branches, but those branches will either be a hires at a level of banker and with the more automated transaction capability. And how exactly that plays out over the next 20 years, I mean there is a lot of technologies that are being tested, for example video tellers, going to a branch and you don’t see a live person; well, you see a live person on a screen, that’s in the central location. And those have had some success. To summarize, we actually are contemplating testing that in 2018. And of course, there is higher level ATMs, cash recyclers and so on, all of which that we’re trying to sort of exactly what to think best configuration for our market. The branch network is not only -- expensive to operate a branch network, but it also is enormous strategic advantage for us and trust. We have a 90% of our deposits or core deposits and the cost of funds that we have that is directly attributable to the extraordinary network where we have staff in those branches. So, this is not something that we’re saying, oh -- I mean it’s a trivial question, this is a very -- question that we’re considering carefully and we’re testing various formats and approaches to see how we can do better.

[Collyn Gilbert:]

Okay. That’s great. That’s very helpful. And then, just two quick hopefully somewhat simple questions. One is, where did the commercial pipeline stand at the end of the fourth quarter?

[Rob Cozzone:]

Just shy of $70 million versus about $160 million at the end of the third quarter.

[Collyn Gilbert:]

Okay. And that’s why you’re saying why growth in the first quarter will be a little bit slower because you got to rebuild that pipeline?

[Rob Cozzone:]

Exactly.

[Collyn Gilbert:]

Okay. And then, also Rob, on the OpEx coming in a little bit higher this fourth quarter than what you all had anticipated, certainly higher than what I had anticipated. What were the -- you mentioned, sorry, I should have this for me, but your severance payments, I think just kind of some of those onetime items that you saw in the quarter?

[Rob Cozzone:]

Yes. The two that I mentioned was a higher incentive accrual and then the severance payment to departing executive. On a combine basis equated to about 2 pennies per share, the incremental.

[Collyn Gilbert:]

Okay. And I could do the math on it, but do you have the whole dollar amount?

[Rob Cozzone:]

It’s about 800,000 -- 800 and change.

[Collyn Gilbert:]

Okay. Okay, great. Okay. That’s all I had. Thank you very much.

[Rob Cozzone:]

Thanks, Collyn.

[Chris Oddleifson:]

Thanks, Collyn.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Oddleifson for any closing remarks.

[Chris Oddleifson:]

Thank you, Brendan. And thank you everybody who has joined us today. We look forward to talking to you about our first quarter results in three months. Have a good weekend. Bye.

[Operator:]

The conference is now concluded.